Equity markets around the world are selling off today (largely) in the wake of Trump’s controversial immigration order and the images of public demonstrations around the nation.
Is this a logical response?
Let’s stipulate that Trump over-reached and will be forced by the courts (as has already happened on a temporary basis) or by public and political pressure to moderate his policy on immigration and visas. But markets are driven as much by perception as they are facts. Whether one sees Trump’s actions are Hitlerish, as his critics allege, or in keeping with a lifelong pattern of initially staking out a hardline position only to compromise later, is largely a function of how one views the world. Whatever the case, at a minimum his style is so unorthodox and unpredictable that it overwhelms the average observer, investors included. And human nature is such that when we are confused or uncomfortable with a situation, we prefer to seek safety. In this case, safety = sell stocks and move to the sidelines until the situation clears.
Is that the right approach? I believe not.
Let’s start with the immediate issue before addressing the larger point. We live in a constitutional democracy, meaning we are a nation of laws, not of sovereign edict. In other words we have political system in which power is dispersed, with checks and balances, across multiple branches of government. The current public outcry is proof that our system is working as it should, and that the immigration matter will be resolved in some type of compromise. When it does, investors will put the latest issue behind them and focus on the things that truly drive stock prices, i.e., earnings. You can bet that the market will adjust much more quickly than one’s emotions. And if Jamie Dimon and Warren Buffett – two successful business people who are not particularly fans of Trump – are right, there is much opportunity for investors in the next few years.
But there is a larger point: scary headlines have always been with us. Wars, recessions, and politicians who make bad decisions are unavoidable. Through it all, investors who ignore the headlines and buy good businesses at good prices have been rewarded. Those who try to time the market or react to headlines fall far behind.
There are only a few ways to invest successfully and many ways to invest poorly. When it comes to the latter, near the top of the list is what I call “investing by headlines”. Even the professionals do this poorly, so please don’t try this at home. As Buffett advises, tune out the headlines and the financial media. The news headlines have little to do with investment returns.
My advice: have a solid long-term investment plan, stick with it, and tune out the headlines. You’ll be glad you did.